Under the loan relationships rules for companies, debits on loan arrangements are not deductible for corporation tax purposes in the following circumstances:
- Generally, no deduction is given for releasing, impairing, or writing off a receivable from a connected company (CTA 2009, s 354). Two companies are connected if one controls the other or both are controlled by the same person, subject to certain exceptions.
‘Control’ includes the power to ensure that the company’s affairs are conducted according to the person’s wishes, whether through shareholding, voting power, articles of association or other regulating documents (CTA 2009, s 472).
- Debits are ignored for tax purposes if the loan is for an unallowable purpose (CTA 2009, ss 441 – 442). This applies where the loan is used in activities:
- which are outside the charge to tax; or
- where one of the main purposes that the company is party to the loan relationship (or a related transaction) is the avoidance of tax.
Keighley & Anor v Revenue and Customs
The recent case Keighley & Anor v Revenue and Customs [2024] UKFTT 30 (TC) had two main strands to it. The first appellant (JK) was a shareholder and director of Primeur Limited. For many years, he used a company credit card to pay for personal expenses but never reimbursed the company. No adjustments were made in the company accounts, the sums did not appear on his P11Ds, and he never declared the expenses on his personal tax returns.
The discovery assessments and associated penalties in respect of the credit cards issued to JK were upheld, with his conduct (unsurprisingly) found to be deliberate. However, while JK’s penalties (based on deliberate behaviour) were upheld, those issued to Primeur Limited in respect of National Insurance contributions (NICs) were reduced, as the director’s deliberate behaviour could not simply be transferred to the company. HMRC had failed to show that the company intended to mislead HMRC.
JK also owned shares in Valley Dale Properties Limited (DVPL), to which both Primeur Limited and its shareholders made loans. The shareholder loans were unsecured, but the loan from Primeur Limited was secured on a property.
DVPL sold the property at a loss, meaning that it had insufficient funds to repay all the loans. The loans from the shareholders were repaid in full, while part of the loan from Primeur Ltd was written off, with the company claiming the loan write-off as a loan relationship debit.
HMRC denied relief for the loan write-off debit on the basis that either:
- the two companies were connected; or
- the loan write-off had an unallowable purpose.
First-Tier Tribunal Decision: The Loan Write-Off
JK and a second shareholder held a majority of the shares and votes in each company. However, the companies were found to be unconnected, as:
- a third person, Mr Fearnley, held shares in Primeur Ltd (but not in VDPL); and
- a shareholders’ agreement provided a list of things which could be done only with his consent.
Moving on to the unallowable purpose rules, on the sale of the property, DVPL should have repaid the secured loan (to Primeur Ltd) in full. Primeur Ltd writing off some of the loan and allowing the shareholders to be repaid first meant that the unsecured creditors benefitted and deliberately deprived the company of income.
Repaying in this way was an unallowable purpose, as it was not within the company’s business or commercial purposes. The resulting debit was therefore disallowed.
Practical Tip
The loan relationships rules are a lot more complicated than many people realise. Be particularly careful where a transaction seems to be deliberately structured in a way to supposedly attract tax relief, but where there is no business purpose to justify the way things have been done.
